Financing the Mozal Project Executive summary We have evaluated the various hazards involved in the Mozal project. The development risk, functioning risk and financing risk are relatively small but the political risk is very excessive. Creeping expropriation and moral hazard are realistic hazards to the task.
The substantial sovereign risk is mirrored in the hurdle rate. The hurdle charge amounts into a much higher value than the internal rate of return. Therefore , it is not simple for the sponsors to undertake the proposed expense in the job.
Regarding the loans gap of $250m, involvement of the IFC is perfect as commercial bankers will not provide financing without the involvement. IFC involvement could be very beneficial for the job but the IFC’s board should not go through while using recommended expenditure of $120m as the high full sovereign coin risk would not justify producing the IFC’s largest expenditure yet. Overview of information The Mozal project, a $1. 4b aluminum smelter in Mozambique, is a partnership between Alusaf, the aluminum subsidiary with the Gencor group, and the Professional Development Company (IDC) of South-Africa, a government possessed development financial institution.
Mozambique is among the poorest countries in the world in support of recently surfaced from a 17-year city war that had damaged the country’s infrastructure. Both parties would every own 25% of Mozal by a great equity investment of $125m. Ownership from the remaining collateral stake of $250m continues to be to be identified. To be able to attract additional funding, the beneficiaries require required to involve the International Financing Corporation (IFC), a member of the World Bank Group. The IFC has a good reputation and solid knowledge in building deals in emerging marketplaces.
The IFC board has brought a recommendation by their team to participate in the project with a $55m older debt and $65m subordinated debt expense. http://www. slideshare. net/prafful16/financing-the-mozal-project http://www. scribd. com/doc/105379331/The-Mozal-Project | Funding the Mozal Project Dernier-né Esty Harvard Business University , Finance Unit February 18, 2150 Case No .: 200-005, Teaching Note: 5-200-025 Abstract: SUBJECT MATTER: project finance, emerging markets, sovereign risk, valuation research, Africa, Foreign Finance Organization, multi-lateral firm
CASE SETTING: June 97, Mozambique, light weight aluminum smelter, $1. billion purchase, $700 million revenue, 750 employees In June 1997, a project crew from the Worldwide Finance Corporation (IFC) was recommending which the board agree to a $120 million purchase in the Mozal project, a $1. some billion light weight aluminum smelter in Mozambique. 4 factors do this recommendation questionable. First, it will be the IFC’s largest purchase in the world and by far their largest investment in Sub-Saharan Africa. Second, the task was tremendous by Mozambican standards, it was not much smaller than the country’s 1996 gross domestic job (GDP).
Third, Mozambique was obviously a very poor nation at the time (per capita GDP of $90) and had simply recently appeared from twenty years of detrimental war. 4th, many aspects with the deal remain undetermined such as who was likely to provide 1 / 2 the collateral needed to financial the project. Despite these kinds of concerns, the sponsors, Alusaf (the aluminum subsidiary in the South Photography equipment minerals organization, Gencor) and Industrial Development Corporation of South Africa (IDC is a development bank), want to framework a limited-recourse deal to finance the smelter, it will be nonrecourse towards the sponsors after completion.
Business bankers include refused to participate unless the Foreign Finance Company gets mixed up in deal and so the sponsors have approached the IFC regarding participation. Following reviewing the project’s business viability and development influence, the IFC team can be recommending the investment. The board must decide unique the right time as well as the right job to make this kind of a large purchase. The case offers four pedagogical objectives. ) It reveals an extreme sort of political risk in a developing country environment and displays how organizations like Institutional Investor, the Economist Intellect Unit, as well as the PRS Group attempt to analyze it to get prospective investors.
2) That illustrates the present day form of politics risk management through project collection, structuring, and insurance, and contrasts this approach with the old, financial design of political risikomanagement whereby beneficiaries simply increased hurdle rates to ensure adequate project earnings. ) It highlights the many roles multilateral development corporations, in general, plus the IFC, especially, can play in loans major tasks. 4) It analyzes IFC’s involvement in appraising, structuring, monitoring, and financing tasks, and reveals how these kinds of activities create value by simply resolving high priced market imperfections including info, distress, firm, and deals costs. Additionally, it explores the IFC’s performance in these several activities. Offered these objectives, the case is acceptable for business/government, strategy, international business, and finance programs. Case and Teaching Newspaper Series